Stocks in Europe close lower, hit by commodity firms

Financials move higher for second straight session, oil falls back

By

SarahTurner

LONDON (MarketWatch) -- European stocks couldn't hold early gains on Tuesday, with a big decline in the commodity extracting sectors pacing a downturn.

As has been common over the last month or two, commodity extractors that have enjoyed a strong run-up on the back of Chinese and Indian economic growth saw sharp falls, while the battered financial sector enjoyed gains.

That's occurred amid hopes that the global financial crisis is running its course while fears about the broader global economy and that of Europe in particular are accelerating.

Quantitative equity strategists at J.P. Morgan note that the correlation between sectors over the last two months has dropped sharply, while the correlation between stocks in the same sector has increased significantly.

"It seems that the market has been completely led by macro factors/data, which led sector moves [to] be the dominant market component," said Marco Dion in a note to clients.

The downturn in commodity-related stocks came as crude-oil futures fell over $2 a barrel amid expectations that the OPEC oil cartel will keep production quotas unchanged at its meeting in Vienna. Metals futures also sold off, with gold futures losing $14 an ounce.

Stocks across the globe blazed ahead on Monday after the U.S. government announced a plan to bail out mortgage giants Fannie Mae and Freddie Mac.

The bailout "lifted confidence in the financial sector yesterday, leading to some recovery in global equities," noted Kenneth Broux at Lloyds TSB corporate markets.

On Tuesday, Morgan Stanley European equity strategists said that they have moved to an overweight position on European equities as they believe a bear market rally is probable given the sharp sell-off in stocks over the last few months, attractive valuations, weak investor sentiment and moderating inflation expectations.

The strategists believes that the risk-reward cycle for domestic cyclical stocks is getting more favorable and intend to start buying selectively in banks, retail and leisure stocks.

"This is a tactical call as we believe the strategic outlook remains difficult due to the probability of significant earnings downgrades and the need for companies to strengthen their balance sheets in the face of difficult capital markets," the strategists said.

Financials up

Broker changes also helped, with shares of Swiss lender Credit Suisse
CS, -1.10%
(001213853) up 1% after it was upgraded to buy from sell at Societe Generale.

The broker said that, while it doesn't expect to see a material change in the outlook for investment banks after the weekend's bailout of Fannie and Freddie, it would be wrong to rule out a gradual improvement in sentiment.

Shares of Vodafone Group (VOD)
VOD, -0.77%
rose 0.9% as the wireless giant announced several executive and organization moves, including the break-up of its emerging markets unit into two and the appointment of a new chief executive for Europe. See full story.

Also, shares in aerospace giant EADS (005730) rose 2.1% as the group's Airbus unit announced a further restructuring effort and as Natixis raised its rating on the company to buy from sell, saying the stronger dollar has a "very beneficial" impact on the company's resilience capacity.

"For EADS valuation, the dollar is more decisive than the economy," the broker said. See EADS story.

Milan-listed investment firms Ifil (IFL) and Ifi (IFP) put in contrasting performances, with Ifil up 5.8% and Ifi down 21.7% after the Agnelli family-owned firms announced that Ifil will merge into Ifi,

The firms hold stakes in some well-known Italian businesses including automaker Fiat and soccer club Juventus.

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